Some investors rely on dividends to grow their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Chengdu Expressway Co., Ltd. (HKG: 1785) is set to be ex-dividend in just 4 days. The ex-dividend date occurs one day before the record date, which is the day on which shareholders must be on the books of the company to receive a dividend. The ex-dividend date is important because any share transaction must have been settled before the registration date to be eligible for a dividend. Thus, you can buy the shares of Chengdu Expressway before June 16 in order to receive the dividend that the company will pay on August 9.
The company’s next dividend payment will be CN 0.12 per share. Last year, in total, the company distributed 0.12 CN to shareholders. Based on the value of last year’s payouts, Chengdu Expressway has a 6.6% return on the current share price of HK $ 2.24. Dividends are a major contributor to returns on investment for long-term holders, but only if the dividend continues to be paid. Accordingly, readers should always check whether Chengdu Expressway has been able to increase its dividends or whether the dividend could be reduced.
Check out our latest analysis for the Chengdu Expressway
Dividends are usually paid out of business income, so if a business pays more than it earned, its dividend is usually at risk of being reduced. The Chengdu Expressway shed a comfortable 35% of its profits last year. Yet cash flow is still more important than earnings in valuing a dividend, so we need to see if the company has generated enough cash to pay for its distribution. It paid out 20% of its free cash flow as dividends last year, which is cautiously low.
It is encouraging to see that the dividend is covered by both earnings and cash flow. This usually suggests that the dividend is sustainable, as long as profits don’t drop sharply.
Click here to see how much of its profits Chengdu Expressway has paid in the past 12 months.
Have profits and dividends increased?
Companies with strong growth prospects generally make the best dividend payers because dividends are easier to grow when earnings per share improve. If profits fall enough, the company could be forced to cut its dividend. For this reason, we are happy to see that Chengdu Expressway’s earnings per share have grown 11% per year over the past five years. The company managed to increase its profits at a rapid rate, while reinvesting most of the profits back into the company. Fast-growing companies that reinvest heavily are attractive from a dividend standpoint, especially since they can often increase the payout ratio later.
Many investors will assess a company’s dividend yield by evaluating how much dividend payments have changed over time. Chengdu Expressway has seen its dividend fall by 3.5% per year on average over the past two years, which is not great to see. The Chengdu Expressway is a rare case where dividends have declined as earnings per share improved. This is unusual to see this and could indicate unstable conditions in the core business, or more rarely an increased focus on reinvesting profits.
From a dividend perspective, should investors buy or avoid Chengdu Expressway? We like the fact that Chengdu Expressway is increasing its earnings per share while simultaneously paying out a small percentage of its earnings and cash flow. These characteristics suggest that the company is reinvesting in growing its business, while the prudent payout ratio also implies a reduced risk of dividend reduction in the future. It is a promising combination that should mark this company worthy of further attention.
Although it is tempting to invest in Chengdu Expressway for dividends only, you should always be aware of the risks involved. Every business has risks, and we have spotted 2 warning signs for the Chengdu highway you should know.
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